Budget Review 2015 Index–16

Robert Dolamore

Introduction

The 2015–16 Budget was introduced into Parliament on 12 May 2015. It is the second Budget of the Coalition Government. This overview provides a summary of the headline numbers, the economic context, the Government’s fiscal strategy and broad policy agenda, and how the fiscal outlook has changed since the Mid-Year Economic and Fiscal Outlook (MYEFO) 2014–15.

The Budget is the government’s key economic and fiscal statement each year. However, the policy process underpinning the Budget is ongoing throughout the year and major policy announcements can be made at any time. The major influences on the content of the Budget include past revenue and expenditure decisions, changing economic conditions, and the government’s fiscal strategy and broader policy agenda.

When assessing the Budget some useful questions to keep in mind include:

• what problems is the Budget trying to address and what does it actually deliver?
• will the decisions in the Budget improve the wellbeing of current and future generations?
• does the Budget support growth and higher future living standards?
• what are the distributional effects of the Budget?
• what are the merits or otherwise of the individual spending and revenue decisions?
• what trade-offs have been made?
• what has been left to another day?

The headline numbers

• The underlying cash deficit is estimated to be $41.1 billion (2.6 per cent of gross domestic product (GDP) in 2014–15, $35.1 billion (2.1 per cent of GDP) in 2015–16 falling to a projected $6.9 billion (0.4 per cent of GDP) in 2018–19.
• Over the four years to 2018–19 accumulated deficits are estimated to total $82.3 billion.
• General government sector receipts are estimated to be $377.3 billion (23.5 per cent of GDP) in 2014-15, $398.0 billion (24.0 per cent of GDP) in 2015–16 rising to a projected $488.2 billion (25.2 per cent of GDP) by 2018–19.
• Tax receipts are estimated to be $351.5 billion (21.9 per cent of GDP) in 2014–15, $370.1 billion (22.3 per cent of GDP) in 2015–16 increasing to a projected $452.5 billion (23.4 per cent of GDP) by 2018–19.
• General government sector payments are estimated to be $415 billion (25.9 per cent) in 2014–15, $429.8 billion (25.9 per cent of GDP) in 2015–16 and increasing to a projected $491.1 billion (25.3 per cent of GDP) by 2018–19.
• In terms of total general government receipts and payments, the revenue side is forecast to make the biggest contribution as a share of GDP to reducing the size of the Budget deficit over the forward estimates period.
• General government sector net debt is estimated to be $250.2 billion (15.6 per cent of GDP) in 2014-15, $285.8 billion (17.3 per cent of GDP) in 2015–16 increasing to a projected $325.4 billion (16.8 per cent of GDP) by 2018–19.
• The face value of Commonwealth Government Securities (CGS) on issue is expected to increase from $499 billion in 2023–24, as estimated at the time of MYEFO 2014–15, to $555 billion. By 2025–26 the face value of CGS on issue is projected to increase to $573 billion.

The Budget deficit is forecast to gradually fall from $41.1 billion in 2014–15 to $6.9 billion in 2018–19. Underlying Cash Balance Year $m % GDP 2013–14 -48,456 -3.1 2014–15 -41,121 -2.6 2015–16 -35,115 -2.1 2016–17 -25,836 -1.5 2017–18 -14,396 -0.8 2018–19 -6,905 -0.4	Underlying Cash Balance % GDP Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 10, Table 1, p. 10–6.
Achieving a surplus depends on closing the gap between payments and receipts... Payments peaked at 26 per cent of GDP in 2009–10 and are estimated to be 25.9 per cent of GDP in 2015–16 and decline to 25.3 per cent in 2018‑19. Receipts bottomed at 21.5 per cent of GDP in 2010–11 and are forecast to be 24.0 per cent of GDP in 2015–16 and increase to 25.2 per cent of GDP in 2018–19.	Receipts and Payments % GDP Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 10, Table 1, p. 10–6.
Net debt is forecast to peak as a percentage of GDP in 2016–17. Net Debt Year $m % GDP 2013–14 202,463 12.8 2014–15 250,234 15.6 2015–16 285,802 17.3 2016–17 313,356 18.0 2017–18 323,723 17.6 2018–19 325,447 16.8	Net Debt % GDP Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 10, Table 5, p. 10–14.
Since MYEFO, policy measures and parameter variations have on balance worsened the near-term budget outlook. Effect on the Underlying Cash Balance of changes since MYEFO Year Policy measures $m Parameter variations $m 2014–15 -578 -181 2015–16 -4,525 650 2016–17 -2,547 -2,445 2017–18 -1,665 -1,251		Effect of policy and parameter changes on the Underlying Cash Balance since MYEFO Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 3, Table 7, p. 3–17.
Where does government spending go in 2015–16? Estimates of Expenses by function   $b % Social security & welfare 154.0 35.4 Health 69.4 16.0 Education 31.9 7.3 Defence 26.3 6.1 General public services 22.2 5.1 All other functions 45.0 10.4 Other purposes 85.7 19.7 Total 434.5 100.0		Expenses by function in 2015–16 Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 5, Table 3, p. 5–8.
Where does the revenue come from in 2015–16?   $b % Individuals income tax 194.3 47.9 Company & resource rent taxes 71.2 17.6 Sales tax (incl. the GST) 61.6 15.2 Fuels excise 17.9 4.4 Other taxes 35.1 8.7 Non-tax revenue 25.3 6.2 Total 405.4 100.0		Revenue in 2015–16 Source: Australian Government, Overview, Appendix B, p. 30.

The economic context

The domestic economic outlook

Over the past year the near-term outlook for the Australian economy has become more subdued with both Treasury and the Reserve Bank of Australia (RBA) revising down their growth forecasts (Table 1).[1] Reflecting the softer outlook the RBA Board has reduced the cash rate by 50 basis points since the beginning of 2015 to further support domestic demand.[2] The forecasts suggest Treasury is slightly more optimistic about the growth outlook for 2015–16. However, both are forecasting growth to be back around the long–term average of 3.2 per cent over the course of 2016–17. Beyond that, Treasury is projecting growth will accelerate in the final two years of the forward estimates to 3.5 per cent.

The more subdued outlook for 2015–16 reflects the balancing out of a number of countervailing forces. The factors supporting stronger GDP growth include strong growth in resources exports and dwelling investment, and solid growth in household consumption. The lift in household spending is being supported by low interest rates, rising household wealth (due to rising house prices) and lower petrol prices. The depreciation of the Australian dollar over the past year will benefit trade-exposed industries such as tourism, higher education services and manufacturing. The Government is expecting exports from these industries to increase at a solid rate over the next couple of years.[3]

Table 1: Treasury and the Reserve Bank of Australia’s near-term growth forecasts (real GDP, per cent)

	2014–15	2015–16	2016–17
Treasury
Budget 2014-15	2.5	3.0	3.5
Budget 2015-16	2.5	2.75	3.25
The Reserve Bank of Australia
SMP* May 2014	2.25–3.25	2.5–4.0	...
SMP May 2015	2.25	2.0–3.0	2.5–4.0

*Statement on Monetary Policy.
Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2014–15, Statement 1, Table 2, p. 1-7; Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 1, Table 1, p. 1-7; Reserve Bank of Australia, Statement on Monetary Policy, May 2014, Table 6.1, p. 63; Reserve Bank of Australia, Statement on Monetary Policy, May 2015, Table 6.1, p. 65.

However, a number of factors are inhibiting growth including large declines in mining investment and Australia’s terms of trade. Mining investment peaked in mid-2012 and is expected to fall significantly over the next few years as existing large-scale projects are completed and fewer new projects are added to the investment pipeline. Treasury is forecasting mining investment will fall by 15.5 per cent in 2014–15, 25.5 per cent in 2015–16 and 30.5 per cent in 2016–17.[4] The fall in mining investment in 2015–16 and 2016–17 is expected to subtract around 4 percentage points from GDP over the three years to 2016–17.[5]

With reference to the sharp fall in the terms of trade, Treasury is forecasting the terms of trade will decline by 12.25 per cent in 2014–15 and 8.5 per cent in 2015–16. Declining commodity prices are weighing heavily on Australia’s terms of trade. The 2014–15 Budget forecasts were based on an iron ore price of $US96 per tonne. This was revised down to $US60 per tonne FOB in MYEFO 2014–15 and to $US48 per tonne in this year’s Budget. The fall in the terms of trade is having a significant dampening effect on incomes and government revenue.

In recent times the factors supporting growth have not been sufficiently strong to keep the economy growing at its long-run average. One consequence of this is a degree of spare capacity in the labour market, with the unemployment rate at its highest level since the early 2000s. Treasury is forecasting the unemployment rate will peak in 2015–16 at 6.5 per cent before declining thereafter to reach 5.75 per cent by 2018–19.[6]

Reflecting the more subdued near-term outlook for product and labour markets, inflationary pressures are well contained. Treasury is forecasting inflation to remain around the middle of the RBA’s target band at 2.5 per cent through the year to the June quarter 2015 and 2016.[7]

If the Australian economy does get back to its long-run average growth rate by 2016–17 this will be a remarkably benign result given the magnitude of the economic adjustment needed as the mining investment boom recedes.

Australia’s growth rate is taking longer to get back to its long-term average

As reflected in the revisions to Treasury’s and the RBA’s forecasts, the Australian economy is taking a little longer to get back to its long-term average growth rate than previously thought. In part this reflects the fact that non-mining business investment is still to kick in. A lift in non-mining business investment is crucial to supporting structural change in the economy by underpinning improved productivity and enhanced competitiveness.

As Professor Ross Garnaut recently observed:

To avoid a long period of weak employment and sagging real incomes and the possibility of deep recession, we need to restore strong investment and output growth in trade-exposed industries outside resources.[8]

Many of the pre-conditions for a lift in non-mining investment are in place. In its latest Statement on Monetary Policy the RBA argued:

Finance is readily available at low cost and business credit growth has increased over the past year or more. Domestic demand growth has picked up and is likely to be supported in the period ahead by relatively strong population growth, low interest rates, low oil prices and the exchange rate depreciation. The Bank’s liaison suggests that a sustained pick-up in demand is required to spur growth in business investment.[9]

Treasury and the RBA have similar expectations as to how the rebalancing of growth will play out. In the near term, stronger dwelling investment, household consumption and exports are expected to boost demand. In time, non-mining investment is expected to respond to stronger demand. Also working in that direction are the health of business balance sheets and the need for some catch-up investment after a period of relatively subdued growth in the non-mining sector capital stock.

Treasury is forecasting non-mining business investment to increase by 4 per cent in 2015–16 and 7.5 per cent in 2016–17. Much hinges on these forecasts because it is stronger non-mining business investment which is expected to drive the increase in Australia’s growth to 3.25 per cent in 2016–17.[10]

Risks

On the domestic front there are two key sources of risk for the economic outlook. First, there is uncertainty about the extent to which households will feel inclined to save less and spend more. Treasury is forecasting household consumption to rise by 3 per cent in 2015–16 and 3.25 per cent in 2016–17. This is consistent with a gradual decline in the savings ratio. On the upside, it could be that household consumption turns out to be stronger than currently forecast if households are inclined to spend more as an effect of rising wealth from the housing market. However, it is also possible that low wages growth, rising unemployment and high levels of household debt will make households wary about increasing spending in the near-term.

Second, there is considerable uncertainty about the recovery in non-mining business investment. It is possible that if household spending surprises on the upside then the recovery in non-mining investment may happen earlier and be stronger than currently forecast. Against this is the possibility that demand and confidence fail to lift and the recovery in non-mining business investment gets pushed further out.

For its part the RBA has pushed out the recovery in non-mining business investment until later in 2016 and considers the risks to this outlook are roughly balanced.[11]

The Australian dollar remains something of a ‘wildcard’ for the outlook for non-mining investment. Professor Garnaut has argued for some time that non-mining business investment will only really increase after there has been a significant and sustained real depreciation in the Australian dollar.[12] Even an exchange rate of $US0.75 may be at the upper bound of the adjustment that is needed.[13] If this is the case and the dollar remains above this level for longer than currently forecast, the recovery in non-mining business investment may be delayed.

Australia is undoubtedly at a challenging juncture as the positive effects of the mining investment boom recede and need for structural adjustment becomes more pressing. Arguably, at this stage the risks remain tilted on the downside.

The global economic outlook

In the last few years global economic growth has stabilised at a moderate pace of around 3.4 per cent, which is a bit below the long-term average of 3.7 per cent. Forecasts suggest that global growth will be little changed in 2015 at around 3.5 per cent (Table 2). The global outlook matters for Australia because as an open economy Australia is affected by developments overseas through financial, trade and investment linkages and confidence and wealth effects.

In its latest update, the International Monetary Fund (IMF) argued that the global outlook is being shaped by a range of complex forces including: many countries still struggling with significant debt burdens; lower oil prices; and a strengthening US dollar.[14] The global recovery continues to be uneven with some countries having markedly better near-term growth prospects than others. The IMF is expecting global growth in 2015 to be driven by a rebound in the advanced economies, which are forecast to grow by 2.4 per cent in 2015 up from 1.8 per cent in 2014. Emerging market and developing economies are forecast to slow slightly with growth decreasing to 4.3 per cent in 2015 from 4.6 per cent in 2014.[15]

A number of factors are expected to drive a modest acceleration in global growth in 2016. Lower oil prices are expected to be a net positive for the global economy. In advanced economies lower oil prices have a stimulatory effect by raising the real incomes of households and reducing costs for firms. This positive effect on global growth is expected to more than offset the dampening effect that lower oil prices have on the growth prospects of oil producers.

The forecast pick-up in global growth in 2016 is also expected to be supported by the further widespread easing of monetary policy that has occurred over the last six months by a number of central banks. Arguably the most significant of these decisions was that of the European Central Bank (ECB), which announced on 22 January 2015 it would be significantly expanding its asset purchase program to include bonds issued by Euro area central governments, agencies and European institutions.[16] Asset purchases support demand by improving liquidity and lowering borrowing costs. Monthly asset purchases amount to €60 billion and will run at least until September 2016.

Treasury’s growth forecasts for the global economy are broadly in line with those of the IMF (Table 2). However, their near-term forecasts for the United States and China are arguably a touch more optimistic. Forecasts from Oxford Economics, a private global advisory firm, are provided in Table 2 as a point of comparison. The summary below draws on all three sources.

Table 2: Treasury, IMF and Oxford Economics international growth forecasts (per cent)

	2014	2015	2016	2017
United States
Treasury	2.4	3.25	3.25	3.0
IMF	2.4	3.1	3.1	2.7
Oxford Economics	2.4	2.3	2.8	2.7
Euro area
Treasury	0.9	1.75	1.75	1.75
IMF	0.9	1.5	1.6	1.6
Oxford Economics	0.9	1.7	1.8	1.7
China
Treasury	7.4	6.75	6.5	6.25
IMF	7.4	6.8	6.3	6.0
Oxford Economics	7.4	6.6	6.1	5.7
Japan
Treasury	0.0	1.0	1.0	0.5
IMF	-0.1	1.0	1.2	0.4
Oxford Economics	-0.1	0.8	1.8	0.8
India
Treasury	7.2	7.5	7.5	7.5
IMF	7.2	7.5	7.5	7.6
Oxford Economics	7.2	7.5	7.5	7.0
World
Treasury	3.4	3.5	3.75	3.75
IMF	3.4	3.5	3.8	3.8
Oxford Economics	3.3	3.2	3.8	3.9

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 2, Table 2, p. 2-6; International Monetary Fund, World economic outlook: uneven growth short- and long-term factors, April 2015; Table 1.1, p. 2.; Oxford Economics, World Monthly Review: The China Syndrome, 12 May 2015.

• United States: The US economy is expected to grow at a solid pace in 2015 and 2016. Although the US economy slowed more sharply than expected in the first quarter of 2015, this was mainly due to severe weather conditions and the effects of industrial disruption at west coast ports. Growth is being supported by lower oil prices, more moderate fiscal adjustment, strengthened balance sheets and an improving housing market. These factors are expected to more than offset the negative effects of a stronger US dollar, which will affect US exports.
• China: The Chinese economy is forecast to slow through to 2017 as it continues to transition to a broader-based model of growth. This slowdown reflects the impact of the ongoing property-market correction and the negative flow-on effects this is having for upstream industries. The Chinese authorities are allowing growth to slow in a controlled manner and pursuing the structural reforms needed to strengthen consumer-driven demand. The moderation of Chinese growth is expected to have important regional implications, impacting on the growth of other Asian economies.
• Japan: The Japanese economy is expected to recover in 2015 after growth stalled last year following an increase in the consumption tax rate. The recovery is being supported by accommodative fiscal and monetary policy settings, improving labour market conditions, lower oil and commodity prices and a weaker yen. Nevertheless, Japanese growth is still quite weak.
• India: India’s growth is expected to strengthen from 7.2 per cent in 2014 to around 7.5 per cent in 2015 and 2016. Business investment has been recovering as confidence has picked up reflecting reduced political uncertainty and the Indian Government’s economic reform agenda. As a major oil importer India is also benefitting from lower oil prices which have reduced firms’ operating costs and benefited consumers.
• Euro area: Recent news from the Euro area has been positive with growth expected to strengthen moderately, supported by lower oil prices, low interest rates and a weaker euro. Export and investment growth is expected to gradually build momentum. This improved outlook has reduced concerns of the euro area experiencing a protracted period of excessively low inflation. While the outlook is more positive for the Euro area as a whole, growth remains quite uneven.
• Other East Asian economies:[17] Treasury reports that economic growth of this group of economies is expected to increase from 4.1 per cent in 2014 to 4.75 per cent in 2015 and 2016.[18] These economies are benefiting from lower commodity prices. The IMF reports that growth among the ASEAN-5 economies is expected to continue to diverge this year with Malaysia forecast to slow in 2015 while growth in Thailand and the Philippines is expected to pick up.[19]

Both Treasury and the RBA are forecasting that growth for Australia’s major trading partners will exceed 4 per cent in 2015 and 2016.

Risks

The risks to the global outlook have become more balanced in recent months but in the IMF’s view are still tilted on the downside.[20]

Potentially, the price of oil is both an upside and downside risk for the global economy. It is possible that lower oil prices could give a stronger boost to demand than currently forecast, particularly for the advanced economies. Alternatively, if the price of oil rebounds more quickly than expected this would likely have a dampening effect on global growth.

For Australia a key risk is the outlook for China. It may turn out that Chinese authorities are not able to manage the slowdown in the economy as well as hoped. Since the onset of the Global Financial Crisis (GFC) China’s debt burden has increased significantly, much of it related to real estate. The authorities continue to face the daunting task of striking the right balance between reducing economic vulnerabilities, supporting growth and implementing structural reforms. It is possible the Chinese economy could slow by more than currently forecast particularly if investment is weaker than expected due to the ongoing real estate correction and more constrained local government spending. This could be expected to negatively impact on Australia through weaker demand for our commodity exports and indirectly through the flow-on effects lower Chinese growth would have for other Asian economies.

Emerging market and developing economies potentially face a triple hit from: a strengthening US dollar (which could have a significant impact on the financial systems of emerging market economies because many banks and companies have increased their borrowing in dollars over the past five years); higher global interest rates; and more volatile capital flows.

There is also a range of geopolitical risks that include developments in the Ukraine, the Middle East and parts of Africa. If these risks were to crystallise they have the potential to disrupt global trade, financial and investment flows, which would weigh on growth. Even if not realised, heightened tensions potentially add to uncertainty and undermine confidence.

In its recent update the IMF warned that in addition to these near-term risks, both advanced and emerging market economies face lower medium-term growth prospects than prior to the GFC.[21] In part this reflects the effects of population ageing as well as the lingering impact of the GFC (such as markedly lower growth in the capital stock). The IMF took the opportunity to once again urge governments around the world to take decisive policy action to boost actual and potential growth, including by pursuing much needed structural reforms.

Australia’s longer-term economic outlook

An important part of the context for any budget is the longer-term challenges and opportunities Australia faces, encompassing the economic, social and environmental dimensions of community wellbeing. Generally, these change little from year to year but nonetheless over time have the potential to have a large cumulative impact on Australia’s economic prosperity and future living standards.

For Australia the list of challenges and opportunities that are likely to shape Australia’s longer-term outlook include:

• an ageing population
• the economic rise of Asia
• new knowledge and technologies
• climate change
• changing patterns of global demand and
• natural resource depletion.

Of a different nature but also important is the risk of external shocks to the Australian economy. They are hard to predict but nevertheless occur not infrequently.

The budget provides an important mechanism through which governments can try to manage the effects of longer-term influences. For example, through patient long-term investment governments can build the capabilities needed to make the most of expected future opportunities and the flexibility and resilience needed in the face of less favourable long-term trends.

Last year’s Budget Strategy and Outlook: Budget Paper No. 1: 2014–15 included a narrative ‘Sustaining strong growth in living standards’.[22] This focused on income as one of the most important determinants of living standards. The main drivers of income growth are productivity growth, changes in the terms of trade, changes in output from increased labour utilisation and growth in net foreign income. The statement discussed the challenges Australia faces in terms of its recent productivity performance, changes in the terms of trade and the changes in workforce participation associated with population ageing.

There was no comparable standalone narrative about the longer-term outlook in this year’s budget papers. However, earlier this year the Government released an updated Intergenerational Report, which assesses the long-term sustainability of current Government policies and how changes to Australia’s population size and age profile may impact on economic growth, workforce and public finances over the next 40 years.[23]

The implications of the economic outlook for the Budget

Generally, the economic context is reflected in the budget in a number of ways including:

• the parameters that underpin Treasury’s estimates and projections of revenue and expenditure items
• the government’s fiscal strategy including judgements about what the appropriate ‘bottom line’ is given the economic outlook and other macroeconomic policy settings and
• the government’s decisions about the nature, size and timing of individual policy measures which will in part reflect how favourable the economic outlook is.

Treasury’s assessment of the economic outlook is reflected in the key economic parameters used to estimate and project revenue and expenditure items. Treasury provides forecasts of the key macroeconomic parameters for the budget year and the following financial year and projections of these parameters for the following two financial years.

Table 3 shows that the forecasts for a number of key economic parameters for 2015–16 have been revised down over the past year, including those for real GDP growth, nominal GDP growth and the terms of trade.

The fiscal estimates and projections are sensitive to changes in the economic parameters. For example, since last year’s Budget, the price of iron ore has fallen rapidly and this and other changes have been reflected in the revisions to the forecasts for Australia’s terms of trade and nominal GDP growth for 2014–15 and 2015–16 (Table 3). As a result of the fall in the price of iron ore, tax receipts have been written down by around $20 billion over the four years to 2017–18.[24] As Stephen Koukoulas recently observed:

Such is the power of the economy in delivering (and hindering) the budget revenue and spending outcomes. A few dollars difference in the global iron ore price, a small change in employment growth or a swing in GDP growth can have a huge impact on the budget bottom line.[25]

This year Budget Paper No. 1 includes Statement 7 ‘Forecasting performance and scenario analysis’, which builds on the information provided in Appendices A and B of Statement 3 in last year’s Budget Paper No. 1. Statement 7 provides useful information about how accurate the forecasts of real and nominal GDP and estimates of government receipts have been. It also presents a number of scenarios to illustrate the sensitivity of fiscal estimates to changes in the economic parameters. The Budget Review includes an article Assessing forecasting risks and uncertainty, which looks at these issues in more detail.

The economic outlook is also reflected in some of the key decisions taken in this year’s budget. At an overarching level the Government has decided to only partially offset the negative effect of falling commodity prices on the budget bottom-line. Given the more subdued near-term economic outlook this decision provides some additional support to the economy at a challenging time, without seeming to delay the projected return to an underlying cash surplus in 2019–20.

In Statement 3 of Budget Paper No. 1 the Government sets out how the decisions in the Budget respond to Australia’s economic outlook. For example, the Government states that it is deliberately redirecting spending to investments which it considers will boost productivity including: the Jobs and Small Business Package; the Families Package; the Northern Australia Infrastructure Facility; and improving Fairness in Tax and Benefits. Separate detailed briefs on many of the budget measures have been prepared as part of this year’s Budget Review.

Table 3: Treasury forecasts of major economic parameters (per cent)

	2013–14	2014–15	2015–16	2016–17	2017–18	2018–19
Real GDP
Budget 2014–15	2.75	2.5	3.0	3.5	3.5
MYEFO 2014–15	2.5	2.5	3.0	3.5	3.5
Budget 2015–16	2.5	2.5	2.75	3.25	3.5	3.5
Employment
Budget 2014–15	0.75	1.5	1.5	2.25	2.0
MYEFO 2014–15	0.8	1.0	1.75	2.0	2.25
Budget 2015–16	0.7	1.5	1.5	2.0	2.0	2.0
Unemployment Rate
Budget 2014–15	6.0	6.25	6.25	6.0	5.75
MYEFO 2014–15	6.0	6.5	6.5	6.0	5.75
Budget 2015–16	5.9	6.25	6.5	6.25	6.0	5.75
Consumer price index
Budget 2014–15	3.25	2.25	2.5	2.5	2.5
MYEFO 2014–15	3.0	2.5	2.5	2.5	2.5
Budget 2015–16	3.0	1.75	2.5	2.5	2.5	2.5
Nominal GDP
Budget 2014–15	4.0	3.0	4.75	5.0	5.0
MYEFO 2014–15	4.0	1.5	4.5	5.25	5.25
Budget 2015–16	4.0	1.5	3.25	5.5	5.25	5.5
Terms of trade
Budget 2014–15	-5.0	-6.75	-1.75
MYEFO 2014–15	-3.7	-13.5	-3.75
Budget 2014–15	-3.7	-12.25	-8.5	0.75

Source: Australian Government, Budget strategy and outlook: budget papers no. 1: 2014–15, Statement 1, Table 2, p. 1-7; Statement 2, Table 1, p. 2-5; Australian Government, Mid-year economic and fiscal outlook 2014–15, Table 1.2, p. 3; Table 2.3, p. 16; Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 1; Table 2, p. 1-7; Statement 2, Table 1, p. 2-5.

The government’s fiscal strategy and broader policy agenda

The fiscal strategy

Consistent with the requirements of theCharter of Budget Honesty Act 1998, the Government has set out in the Budget its medium-term fiscal strategy. The objective of the Government’s fiscal strategy is to ‘achieve budget surpluses, on average, over the course of the economic cycle’. The details of the fiscal strategy can be found in Statement 3 of Budget Paper No. 1 (see box 1 on page 3-7).

The Budget projections show that since MYEFO 2014–15, the outlook for underlying cash balance has worsened by about $12.5 billion over the four years to 2017–18, although it is still projected to return to surplus in 2019–20. Beyond that point modest surpluses of less than one per cent of GDP are projected out to 2025–26. Of course, given the difficulty of forecasting beyond the forward estimates period there is considerable uncertainty around the medium-term projections.

The average annual pace of fiscal consolidation to 2018–19 of 0.5 per cent of GDP is broadly consistent with the 2014–15 Budget.

Complementing its medium term fiscal strategy, the Government has set itself a budget repair strategy. This strategy sets a clear objective around when a strong budget surplus will be achieved, which is consistent with the medium-term fiscal strategy. The Government’s goal is to deliver budget surpluses building to at least 1 per cent of GDP by 2023–24. The details of the budget repair strategy are also set out in Box 1 in Statement 3 of Budget Paper No. 1 (see page 3-7). As the Government acknowledges, the projected underlying cash surpluses from 2019–20 do not meet its budget repair target.[26] As a consequence further fiscal adjustment will be needed in future budgets. In part the size of the fiscal adjustment needed to achieve the Government’s target will depend on how strongly the economy grows from here. If growth surprises on the upside, the size of the fiscal adjustment needed would be smaller than currently projected. If, however, growth disappoints then the size of the fiscal adjustment needed in future budgets will be larger.

A key element of the Government’s budget repair strategy is a commitment to more than offset new spending measures by reductions elsewhere in the Budget. The Government’s decision not to proceed with the Paid Parental Leave Scheme has allowed it to use the money allocated to the scheme to more than offset the cost of policy decisions taken since MYEFO 2014–15. Consequently, the budget position is better off by $1.6 billion over the five years to 2018–19.

On the other hand, the Government’s decision not to proceed with certain measures from the 2014–15 Budget plus the cost to the budget of delays in passing legislation since MYEFO 2014–15, has worsened the budget position by $5.2 billion over the five years to 2018–19.

The government’s broader policy agenda

The Budget has also been framed around the Government’s broader policy agenda. This year the major policy themes in the Budget include:

Building a stronger economy: Jobs, growth and opportunity—the Jobs and Small Business Package; the Northern Australia Infrastructure Facility; and additional support for farmers through the extension of drought relief loan schemes and social and community support measures.

Supporting Australian families—increased support for child care assistance including a new Child Care Subsidy and a two year pilot program for in-home care by nannies; increased funding for the Immunise Australia programme; and new and amended listings on the Pharmaceutical Benefits Scheme, including for more effective cancer treatments.

A fairer Australia—strengthening the integrity of the tax system; strengthening the integrity and sustainability of the welfare system; and strengthening Australia’s foreign investment framework.

Protecting Australia—new funding for national security measures and additional funding to extend and expand Australia’s military operations in Afghanistan, Iraq and the Middle East.

As part of this year’s Budget Review, the Parliamentary Library’s research specialists have prepared briefs on the major policy decisions taken in the Budget.

The fiscal outlook

The Budget forecasts an underlying cash deficit of $35.1 billion (2.1 per cent of GDP) in 2015–16, improving to a projected deficit of $6.9 billion (0.4 per cent of GDP) in 2018–19 (Table 4).

The size of the projected fiscal consolidation between 2015–16 and 2018–19 is around 1.7 per cent of GDP. By way of comparison, at the time of MYEFO 2014–15, the size of the projected fiscal consolidation between 2014–15 and 2017–18 was around 1.9 per cent of GDP.

The pace of fiscal consolidation is relatively even across the forward estimates period: around 0.6 per cent of GDP between 2015–16 and 2016–17; 0.7 per cent of GDP between 2016–17 and 2017–18; and 0.4 per cent of GDP between 2017–18 and 2018–19.

The revenue side accounts for most of the projected fiscal consolidation between 2015–16 and 2018–19, with general government sector receipts estimated to increase by around 1.2 per cent of GDP over the period. Taxation receipts are expected to increase by around 1.1 per cent of GDP and non-taxation receipts by around 0.1 per cent of GDP.

Table 4: The underlying cash balance

	2013–14	2014–15	2015–16	2016–17	2017–18	2018–19
Underlying cash balance ($m)	-48,456	-41,121	-35,115	-25,836	-14,396	-6,905
Per cent of GDP	-3.1	-2.6	-2.1	-1.5	-0.8	-0.4

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 10, Table 1, p.10-7. General government sector payments are expected to fall by around 0.6 per cent of GDP between 2015-16 and 2018–19.

Given the Budget relies heavily on stronger taxation receipts over the next four years to substantially reduce the underlying cash deficit, much would appear to hinge on economic growth getting back to its long term average of around 3.2 per cent in 2016–17. In the wake of the GFC, Australian growth has averaged just 2.5 per cent a year between 2008 and 2014. If growth disappoints then tax receipts may not grow strongly enough to keep the Government’s planned fiscal consolidation on track. This would make achieving the Government’s goal of reaching a budget surplus of at least 1 per cent of GDP by 2023–24 harder and would require larger future fiscal consolidation measures.

There is also risk on the expenditure side. Real expenditure growth between 2015–16 and 2018–19 is forecast to average just 1.8 per cent per year. This compares with average real growth between 1980–81 and 2014–15 of around 3.3 per cent per year. The Government will need to maintain considerable fiscal discipline over the next few years if it is to reduce expenditure by around 0.6 per cent of GDP between 2015–16 and 2018–19.

The structural budget balance

In Statement 3 of Budget Paper No. 1 the Government reports on the structural budget balance.[27] Estimates of the structural budget balance remove the temporary changes to revenues and expenditures, due to fluctuations in commodity prices for example, and the extent to which economic output deviates from its potential level due to the economic cycle. As the Government notes, when considered in conjunction with other measures, estimates of the structural budget balance can provide insights into the sustainability of current fiscal settings.

The structural budget balance is estimated to improve from a deficit of around 1.25 per cent of GDP in 2015–16 to modest surpluses from 2018–19 through to the end of the projections period in 2025–26. This outlook is largely unchanged from the forecasts in MYEFO 2014–15.

How has the short-term fiscal outlook changed?

Figure 1 provides a snapshot of how the outlook for the underlying cash balance has changed since the 2014–15 Budget. Over the four years to 2017–18, it has worsened since last year’s budget. While the forecasts and projections still show a consistent pattern of gradually declining cash deficits, in dollar terms the deficit in 2017–18 is now projected to be around 5 times larger than was the case at the time of last year’s budget.

At the time of the 2014–15 Budget the size of the accumulated budget deficits over the four years to 2017–18 was $60.2 billion. This figure was revised up in MYEFO 2014–15 to $103.9 billion and in this year’s Budget to $116.5 billion. This suggests that since last year’s Budget there has been slippage over the four years to 2017–18 of $56.3 billion.

The bulk of this slippage is due to parameter and other variations (Table 5). The cumulative impact of parameter and other variations over the four years to 2017–18 has been to worsen the fiscal outlook by around $42.8 billion (76 per cent of the overall slippage). The cumulative impact of policy changes over the same period has been to worsen the fiscal outlook by around $13.4 billion (24 per cent of the overall slippage).

Focusing just on developments since MYEFO 2014–15, the fiscal outlook over the four years to 2017–18 has worsened by around $12.5 billion. Policy changes account for $9.3 billion (74 per cent) and parameter and other variations for $3.2 billion (26 per cent) of the overall slippage.

Figure 1: Revisions to the underlying cash balance ($m)

Source: Australia Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 1, Table 1, p. 1, Statement 3, Table 7, p. 3-17.

• Since MYEFO 2014–15 policy decisions have increased payments by around $10.1 billion over the four years to 2017–18, which has been partially offset by decisions which have increased receipts by around $0.8 billion over the same period.
• Since MYEFO 2014–15 parameter and other variations have reduced payments by around $17.4 billion and increased Net Future Fund earnings by an estimated $0.7 billion. Against this, parameter and other variations have reduced receipts by around $21.3 billion.

Statement 3 of Budget Paper No. 1 includes a detailed reconciliation of the changes to the projected cash balance since the 2014–15 Budget.

Table 5: The effect of policy and parameter variations on the underlying cash balance

	Changes from 2014–15 Budget to 2014–15 MYEFO $m		Changes from 2014–15 MYEF to Budget 2015–16 $m
	Policy decisions	Parameter changes	Policy decisions	Parameter changes
2014-15	-2,314	-8,275	-578	-181
2015-16	-2,195	-11,960	-4,525	650
2016-17	-501	-9,781	-2,547	-2,445
2017-18	950	-9,606	-1,665	-1,251
Total	-4,059	-39,622	-9,315	-3,227

Source: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 3, Table 7, p. 3-17.

The Commonwealth’s balance sheet

The deterioration in Australia’s short-term fiscal outlook is reflected in the Commonwealth’s balance sheet (see Table 6). In broad terms, larger projected cash deficits over the four years to 2017–18 mean that the Australian Government faces a larger financing requirement and will need to borrow more.

Net financial worth

The primary indicator of fiscal sustainability articulated in the Government’s medium-term fiscal strategy is net financial worth (that is, total financial assets minus total financial liabilities). It provides a broad measure of the Government’s assets and liabilities as it includes both the assets of the Future Fund and the superannuation liability the Future Fund is intended to offset. One of the goals of the Government’s medium-term fiscal strategy is to strengthen the Government’s balance sheet by improving net financial worth over time.

• The short-term outlook for the Commonwealth’s net financial worth has deteriorated over the past year. It was projected to be -$352.7 billion (18.7 per cent of GDP) in 2017–18 at the time of Budget 2014–15; this declined to -$398.7 billion (21.5 per cent of GDP) at the time of MYEFO 2014–15; and declined further to -$415.2 billion (22.6 per cent of GDP) in this year’s Budget.

General government sector net debt

Australian Government general government sector net debt is equal to the sum of deposits held, government securities (at market value), loans and other borrowings, minus the sum of cash and deposits, advances paid and investments, loans and placements.

• At the time of last year’s Budget net debt was forecast to be $264.2 billion by 2017–18 (14 per cent of GDP). This projection was revised up in MYEFO 2014–15 to $315.8 million (17 per cent of GDP) and to $323.7 billion (17.6 per cent of GDP) in this year’s Budget.
• Net debt as a percentage of GDP is still projected to peak in 2016–17 but at a higher level. The Budget has net debt as a percentage of GDP peaking at 18 per cent of GDP in 2016–17 compared with 17.2 per cent of GDP at the time of MYEFO 2014–15 and 14.6 per cent of GDP at the time of last year’s Budget.

General government sector net interest payments

Australian Government general government sector net interest payments are equal to the difference between interest paid and interest receipts.

• In dollar terms, net interest payments are now projected to be marginally lower in 2017–18 than was the case in last year’s Budget, but unchanged as a percentage of GDP.

Table 6: Net financial worth, net debt and net interest payments ($b and %)

	2014–15	2015–16	2016–17	2017–18	2018–19
	Net financial worth
Budget 2014–15 ($b)	-329.2	-342.4	-351.0	-352.7
Budget 2014–15 (% GDP)	-20.2	-20.0	-19.6	-18.7
MYEFO 2014–15 ($b)	-347.9	-374.8	-392.7	-398.7
MYEFO 2014–15 (% GDP)	-21.6	-22.3	-22.2	-21.5
Budget 2015–16 ($b)	-350.1	-383.5	-406.0	-415.2	-417.8
Budget 2015–16 (% GDP)	-21.8	-23.2	-23.3	-22.6	-21.6
	Net debt
Budget 2014–15 ($b)	226.4	246.4	261.3	264.2
Budget 2014–15 (% GDP)	13.9	14.4	14.6	14.0
MYEFO 2014–15 ($b)	244.8	279.6	304.4	315.8
MYEFO 2014–15 (% GDP)	15.2	16.7	17.2	17.0
Budget 2015–16 ($b)	250.2	285.8	313.4	323.7	325.4
Budget 2015–16 (% GDP)	15.6	17.3	18.0	17.6	16.8
	Net interest payments
Budget 2014–15 ($b)	10.5	11.5	12.2	12.9
Budget 2014–15 (% GDP)	0.6	0.7	0.7	0.7
MYEFO 2014–15 ($b)	10.8	11.3	12.1	12.7
MYEFO 2014–15 (% GDP)	0.7	0.7	0.7	0.7
Budget 2015–16 ($b)	10.9	11.6	11.9	12.3	13.0
Budget 2015–16 (% GDP)	0.7	0.7	0.7	0.7	0.7

Source: Australian Government, Budget strategy and outlook: budget papers no. 1: 2014–15, Statement 10, Table 5, p.10-11, Table 8, p. 10-14; Australian Government, Mid-year economic and fiscal outlook 2014–15, Appendix D, Table D6, p. 273, Table D9, p. 277; Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 10, Table 4, p. 10-12, Table 8, p. 10-19.

• The Budget assumes that the weighted average cost of borrowing for the future issuance of Treasury Bonds in the forward estimates period will be slightly lower than was the case in last year’s Budget and MYEFO 2014–15.

Statement 6 of Budget Paper No. 1 includes a detailed reconciliation of the changes in the Commonwealth’s balance sheet since the time of MYEFO 2014–15.

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[1].          The budget figures in this article have been taken from the following document unless otherwise sources: Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16.

[2].          Reserve Bank of Australia, Statement on Monetary Policy, May 2015, p. 4.

[3].          Australian Government, Budget strategy and outlook: budget paper no. 1: 2015–16, Statement 2, Box 2, pp. 2–13–2–14.

[4].          Ibid., Statement 2, Table 1, p. 2–5.

[5].          Ibid., p. 2–16.

[6].          Ibid., Statement 1, Table 2, p. 1–7.

[7].          Ibid., p. 2-18.

[8].          R Garnaut, ‘We need a plan to revive the economy’, Australian Financial Review, 8 April 2015, p. 8.

[9].          Statement on Monetary Policy, May 2015, op. cit., p. 39.

[10].       Budget strategy and outlook: budget paper no. 1: 2015–16, op. cit., p. 2–3.

[11].       Statement on Monetary Policy, May 2015, op. cit., pp. 68–69.

[12].       R Garnaut, Dog days: Australia after the boom, Redback, Collingwood, Vic, 2013.

[13].       R Garnaut, ‘We need a plan to revive the economy’, op. cit.

[14].       International Monetary Fund, World Economic Outlook: uneven growth: short- and long-term factors, April 2015, pp. 68–69.

[15].       Ibid., p. 2.

[16].       European Central Bank, ECB announces expanded asset purchase programme, media release, 22 January 2015.

[17].       Other East Asian economies comprises the newly industrialised economies of Hong Kong, South Korea, Singapore and Taiwan and the Association of South East Asian Nations group of five (ASEAN 5): Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

[18].       Budget strategy and outlook: budget paper no. 1: 2015–16, op. cit., p. 2–6.

[19].       World Economic Outlook: Uneven growth: Short- and long-term factors, op. cit., p. 15.

[20].       Ibid., p. 18.

[21].       Ibid., see Chapter 3.

[22].       Australian Government, Budget strategy and outlook: budget paper no. 1: 2014–15, Statement 4.

[23].       Australian Government, 2015 Intergenerational Report: Australia in 2055, March 2015.

[24].       Budget strategy and outlook: budget paper no. 1: 2015–16, op. cit., p. 3-5.

[25].       S Koukoulas, Budget 2015: surplus could be sooner than we think, ABC website, 13 May 2015.

[26].       Ibid.

[27].       Ibid., p. 3-12–3-13.

 

All online articles accessed May 2015. 

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